We are evaluating a project that costs $870,000, has an 7-year life, and has no salvage...

We are evaluating a project that costs $870,000, has an 7-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 124,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $880,440 per year. The tax rate is 31 percent, and we require a 15 percent return on this project.

Requirement 3: Sensitivity of OCF

(a)	In addition to NPV, we can calculate the sensitivity of other things, such as OCF. What is the sensitivity of base-case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%. (Do not round your intermediate calculations.)

	-2.99

Based on this sensitivity, estimate the change in OCF (in dollars) given a 6% decrease in the variable costs? (Do not round your intermediate calculations.)

Expert Solution

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jeff jeffy answered 2 years ago

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